[mmtl-row][mmtl-col width=”1/1″][mmtl-text] Amazed? This is possible if you take the right approach while dealing with your taxes. Today we will show you the secret “The Vidura Way” of how to pay ZERO TAX on the income of Rs.18 Lakhs! (Tax Calculation has been done as per the Finance Act 2019 i.e. for F.Y. 2019-20) Here is the quick snapshot:
|Normal Way||The Vidura Way|
Vidura Way includes these 3 steps, which needs to be followed-
- Understanding Your Current Income Structure
- Restructuring CTC to reduce Tax outgo
- Making best use of available Tax provisions & Deductions.
Still Confused? let me explain, “The Vidura Way”, with the help of story of two brothers Karan & Arjun. Picture this: Today is the day when their mom could not hold her excitement and kept repeating to herself “Mere Karan Arjun aayenge! Salary laayenge!” and then the magical moment happened followed by a disappointment from Arjun. Even after earning 18 lakhs income Karan paid zero tax and Arjun paid heavy taxes. Let me guess you are wondering “what happened back there??” Well, Karan used “The Vidura Way” which helped him dramatically save his taxes by taking advantage of the nitty gritty of Tax Laws. Let’s first look at the table, then we will go through the brief description of all the terms listed in it:
|Particulars||Per Month||No. of Months||Amount (Rs.)||Allowance/ Deduction Exempt||Taxable Income|
|Childern Allowance(2 children)||100||12||2400||2400||0|
|Children Hostel Allowance(2 children)||300||12||7,200||7,200||0|
|Free food & beverage Coupons||1100||12||13,200||13,200||0|
|Daily Allowance (60*600)||36,000||36000||0|
|Travelling Allowance (20*5000)||1,00,000||1,00,000||0|
|Leave Travel Allowance||30,000||30,000||0|
|Employer Contribution to NPS||84,000||84,000|
|Income from salary||17,90,000||12,82,200|
Income /loss from house property (house loan interest from S.O property)
|Interest From Saving Account||6500|
|Interest From Post office||3500||10,000|
|Gross Total Income||18,00,000||10,92,200|
|Less – Deductions under chapter VI- A|
|Total Income & Taxable Income||4,98,200|
Below is the calculation of how zero tax is paid on Rs. 4,98,200 .
|Total taxable Income||Tax on 2,50,000||Next 248200/- @5%||Less- Rebate u/s 87A||Tax|
Rebate u/s 87A– This Rebate is the maximum allowed up to Rs. 12,500/- if total income is less than or equal to Rs. 5, 50,000/-. [For F.Y. 2019-20] As per the proposals of Budget 2018, there was a standard deduction of Rs. 40,000/- instead of Transport Allowance and Medical Reimbursement tax benefits for F.Y. 2018-19.
However, as per Budget 2019, limit of standard deduction has been increased from Rs. 40,000/- to Rs. 50,000/-
Also note, assessee can additionally claim deduction under section 80DD & 80DDB subject to conditions attached.
Let’s begin with STEP 1:
Understanding your current CTC structure:
A lot of tax planning is hidden in your CTC structure itself. There are many components in your CTC that are 100% tax-free, without any conditions and some are exempt up to certain limits. Karan saved Rs. 57,408/- of taxes by taking advantage of 100% tax-exempt expenses-
- Telephone Expenses
- Daily Allowances
- Traveling Allowances
- Uniform Expenses
- Even club expenses!
Yes, if above-mentioned expenses you incur for official purpose and your employer makes them a part of your CTC, you must claim the tax benefits. In case you have them as a part of your CTC, then don’t forget to take tax SAVING advantage. Now, moving to the next step i.e. Step-2
Restructure your Income Structure
A little re-jig of CTC helped Karan save Rs.2,994/- of TAXES!!! Here are the lists of tax-exempt expenses with limits:
|Allowance/Expense||When/Why Incurred||Limit||Amount of Tax Saved(Rs.)|
|Children Education Allowance||Education Fees of Children||100/month per child for max. two children||748/-|
|Hostel Expenditure||Hostel expenses of children||300/month per child for max. two children||2,246/-|
As per the proposals of Budget 2018, there was a standard deduction of Rs. 40,000/- instead of Transport Allowance and Medical Reimbursement tax benefits. However, as per Budget 2019, limit of standard deduction has been increased from Rs. 40,000/- to Rs. 50,000/-. Some other expenses, that you incur every day but did not realize tax benefit attached to them-
Free Food & Beverage Coupons:
Got cafeteria food coupons to munch during office hours? Very yummy right. Tax department makes food & beverage coupons up to Rs.50 per meal tax-free. So, if we calculate the total tax-free amount, it comes to be Rs. 13,200 (Voucher Rs.50 per day*22 Days *12Months) – Tax benefit on food coupon- 4,118/- Now comes our favorite one:
HRA(House Rent Allowance)
Tax Benefit: It’s the minimum of :
- Actual HRA received;
- 50% of salary if living in a metro city (40% for other cities) ;
- Rent paid minus 10% of basic salary and D.A.
(HRA exemption Calculation:- (on the basis of rent paid) (325400– (10% of 1094000)= 216000 40% of 1094000 =437600 HRA received =336000 Use our calculator to see how much you save. (Tax benefit on HRA- 67,392/-) This year take your family out for vacation and enjoy dual benefit! How? Let’s see in the next one-
Leave Travel allowance:
You can claim expenses of journeys for 2 years in a block of 4 years with your family. The exemption on the fare is limited to going anywhere in India. However, the journey should be the shortest route. link (Tax benefit on LTA- 9360/-) Although the next one contributes the lesser amount to the exemption value from taxable income, it’s worth if it is saving your tax.
Gift from the company:
If you received any gift from your employer, then there is a double reason to cheer. The value of gifts/ vouchers given by the employer to you or your family member is tax-free if the value is up to Rs.5000 in a year. ( Tax Benefit- 1,560/-) Pin up the lists of all these expenses on your reminder board. So, next time you meet your manager, make a request to re-jig your CTC to include them to save taxes. While you are still in the trauma of losing your money to Income Tax department in previous returns, let us tell you about this amazing way of saving tax on house property that Karan used.
Making best use of available Tax provisions & deductions
House Property :
Sold your house to purchase a new one in some time. Save yourself from the high capital gain tax. How? Let me explain… There is a provision in income tax that states, if you sold your house and intend to buy a new one within a period of 2 years, then, there is no need to pay the capital gain tax on it. Just deposit the proceeds gained from selling the old house, in CGAS account and buy a new one with this money. What’s more, in case, you took the loan to finance the new expensive house. Then, Income Tax has further sweetened the deal.
Use House Loan interest from Self Occupied property!
If your property is the only property you owned and it is SOP (self-occupied) or is vacant, then you can claim the deduction for the EMI paid. (NOTE: self-occupied property doesn’t necessarily mean you live there. Property occupied by Your spouse, children or dependent parents will be considered as S.O.) You can claim the amount of interest paid to your bank up to Rs. 2,00,000/- towards interest on the home loan in your ITR. This interest paid is set-off against your any other head of income only maximum upto Rs. 2,00,000/-. Thus, reducing your taxable income and tax slab.- (Tax Benefit – Rs. 62,400/-) What’s more interesting is that You claim both HRA and House loan interest at the same time. You can claim both, -If you are staying in a rented house, then you are eligible to claim HRA tax exemption. Simultaneously, if you have taken a house loan then you can claim the house loan benefits too. If you have bought a house with the help of a home loan and live in another house on rent, you can claim tax benefit for both. But if the house you bought and the house you live in is in the same city, you should have a genuine reason for not living in the house that you own. The reasons could be that the house you own is too far from your workplace, or the commute is very difficult. Read More… Pretty brilliant, right?
Capital Gains on Shares
What Karan planned will leave you awestruck! Long-term Capital Gains on sale of listed equity: The capital gain earned through the sale of shares exceeding Rs. 1,00,000 is taxable at 10 percent without indexation. Although exemption is provided only when these 2 conditions fulfilled :
- The transaction made should be from recognized stock exchange and,
- The holding period should be of more than 12 months.
So he actually purchased shares, kept to himself for more than 12 months and the income he received on selling upto Rs. 1,00,000/- is tax-free. Bold move but if it saves tax then it’s worth trying! However, as per the proposals of Budget 2018, for the first time, long-term capital gains from listed equities exceeding one lakh has been taxed at 10 percent without indexation. This is be applicable from F.Y. 2018-19.
Income from other sources:
Sharing my personal experience: once we received a notice from income tax department that my grandma is getting interest from her savings accounts and FD’s and she didn’t even know income was taxable. Remember! what you don’t know might hurt you. Such kind of mistakes might lead you to come into Income Tax scanning. So here are the other sources of income that Karan had:
- Savings account: The interest received every year is counted as Income from other sources. But, you can claim deduction under section 80TTA up to Rs.10,000.
- Post office: There are lots of saving schemes and investment plans provided by Indian Post Office. You can apply for an account which is transferable from one post office to other. Interest from Saving account of Post Office is eligible for certain tax benefits.
- Gift income from relatives: In India the most peculiar form of income is through gifts. There are some benefits and relief given to this type of income. The maximum limit of exempted is of Rs 50,000 for the gifts received from people that are not relatives. Gift from relatives is tax-free.
Deduction u/s chapter VI- A
Have you ever wished to reduce your expenses? You can frame your expenses tax-free by making good investment decisions just like Karan. These are the 10 deductions which he used, to take maximum tax benefit.
- 80TTA: The deduction under this section allowed on the interest received on the savings account. The limit is up to Rs. 10,000 that it will be considered as income from Other sources.
- 80C: Under this section, you can claim a deduction up to Rs. 1,50,000 by investing in LIC, Tuition fees, Principal repayment of housing loan, PPF, NSC, Mutual Funds etc.
- 80CCD(1B): You can avail an additional benefit of Rs.50,000 under this section if you have contributed to National Pension Scheme. This is over and above the limit of Rs.1,50,000.
- 80CCD(2): It is the section in which Deduction is available on the contribution paid by employer . It is limited to 10 % of Basic + DA. Now this is the one where you gain multiple benefits- your employer makes the contribution, Your retirement gets secure and you get tax advantage!
- 80D: The tax deduction under this section is allowed on the premium paid on medical insurance. Deduction limit:
- For Self (Below 60 years ) -Rs.25,000 per year
- For Self ( 60 years or above ) –Rs.50,000 per year
- For parents (Below 60 years ) – Rs. 25,000 per year
- For parents ( 60 years or above ) Rs.50,000 per year
ADVICE: Getting a Medical insurance can help you cover the unexpected health emergency.
- 80DD: This section specially launched to provide some relief to the people with the disability also known as Disable Dependent. Deduction of Rs. 1,25,000 is claimed in case of severe disability. This means when you have more than 80% disability and Rs. 75,000 for more than 40% disability.
- 80DDB: Expenses incurred during the specific ailments (like AIDS, Cancer and neurological disease) are covered under this section. In case of self or dependent is up to Rs. 40,000 and in case of senior citizen it is up to Rs. 60,000 and very senior citizen up to Rs. 80,000.As per the proposals of Budget 2018, for the purpose of deduction u/s 80DDB, the class of super senior citizen has been submerged into senior citizen and also the limit of Rs.60,000/80,000 has been increased to Rs. 100,000 or the amount actually incurred, whichever is lower.
- 80E: This allows deduction on the interest paid on higher education loan.
- 80EEA : The union budget 2019 introduced new section which provide interest deduction for housing loan taken for affordable housing for the first home buyers. The maximum deduction available under this section is Rs. 1,50,000 and loan should be taken during 01 April, 2019 to 31 March, 2020. This deduction is over and above exemption available under section 24 of Rs. 2,00,000.
- 80G: If the amount has been donated or given to charity then the deduction is allowed. This amount claimed can be made on 100% or 50% with or without the Qualifying limit.
- 80TTB: As per the proposals of Budget 2018, a new section 80TTB has been inserted so as to allow a deduction up to Rs 50,000/- in respect of interest income from deposits held by senior citizens. However, no deduction under section 80TTA shall be allowed in these cases. Thus, for senior citizens, if Interest on FD or Saving Bank income is there than 50,000 deductions from income will be allowed. This is applicable from F.Y. 2018-19.
Want to know the complete deduction lists? Click here to read the complete guide. We hope that this article made your tax planning journey a little bit easier. Felt something missing or have any query? let us know in the comments section and we will help you out. Don’t have enough time to look for CA? Here’s a TEAM of expert CAs ready to help you 24×7. [/mmtl-text][/mmtl-col][/mmtl-row]